Analysts: Early elections of little concern

Party politics causes UBS to drop rating on Israel for private investors.

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Analysts showed little concern for the impact that early elections might have on the economy, saying that the positive macroeconomic trends were strong enough to weather the political storm which erupted this week with the resignation of Prime Minister Ariel Sharon from the Likud.
While three analysts interviewed by The Jerusalem Post on Tuesday agreed that economic growth would continue regardless of who sits in the Treasury after a prospective March 2006 election, only investment firm UBS viewed the current situation with caution, dropping its rating on Israel for private investors.
"Party politics have clouded the outlook for economic policies in Israel," UBS Asset Management said in a report to its clients. "While valuations are attractive, we have downgraded our recommendation to Neutral."
In contrast, Standards and Poor's analyst for Israel Beatriz Merino said that S&P sees no reason to change its 'A-' rating with the prospect of early elections.
"The economy is doing well, showing robust growth and the progress made in implementing structural reforms should encourage domestic and foreign investment," Merino said.
She added, however, that S&P will evaluate the economic policy agenda of the new government formed after the elections.
"If a new government were to attempt to reverse the reforms or bring in higher spending, increase the government deficit and raise the debt-to-GDP ratio, the ratings would come under downward pressure," she said. "On the other hand, if it continues to implement the reforms and maintains fiscal discipline, there is a possibility that we would raise our recommendation."
Under former prime minister Binyamin Netanyahu, who is now the leading candidate to take Likud into the elections, the Treasury embarked on policies of privatization, spending cuts, lowering taxes and reform of the capital markets and the banking system. Netanyahu's tenure as Finance Minister was also defined by attempts to encourage participation in the workforce by cutting welfare handouts.
While the economic platform of the three main contenders in the election - Labor, Likud and Sharon's newly-formed centrist party - remains largely unknown, Merino warned that Labor could be more prone to spend on social issues and would be the most likely to slow down the economic reforms.
Widely seen as the worker's champion, Labor Party chairman Amir Peretz has been head of the Histadrut Labor Union for over a decade.
"Regardless of who comes to power and gets the Finance Ministry, the mainstream would still rule and keep the strong macroeconomic parameters," said Robi Nathanson, chairman of the Israel Institute for Economic Social Research.
"Even with Peretz's softer policy on social issues and his expected cuts in the security and defense budget, steps will be made to keep the budget deficit under control."
Nathanson added that even with a Sharon-led government, some changes of priorities in the budget can be expected, making corrections to the social program that Netanyahu implemented.
While future economic policy remains a source of speculation, the stock market reaffirmed analysts' predictions of economic stability in the run-up to the elections.
The TA-25 index dropped by 1.4 percent in trade on Monday following Sharon's resignation.
Rafi Melnick, dean of the Lauder School of Government at the Interdisciplinary Center Herzliya, attributed the fall to the Hizbullah attacks on Israeli towns in the north that day rather than party politics which seem set to dominate the headlines in the months to come.
"Most important is that the fundamentals of the economy are strong," he said. "I don't believe that elections will be powerful enough to break the trend."

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